US pressure over India tax law

Posted on April 18, 2012

US business groups are putting pressure on Tim Geithner, the treasury secretary, to intervene in an effort to stop India from enacting a contentious retroactive taxation law that they argue would have “severe consequences” for American investors in the country.

A coalition of large American trade associations – mainly from the technology and financial services sectors – sent a letter to Mr Geithner asking him to “raise concerns” about the tax bill in talks with Indian officials during the spring meetings of the World Bank and International Monetary Fund this week.

The letter, which was also signed by the US Chamber of Commerce, the largest lobby group for corporate America, said: “We believe that the implementation of these provisions will have immediate and severe consequences for companies, affecting their willingness to commence or continue their operations in India.”

In March, India unveiled a series of amendments to its 2012 finance bill that have angered a wide range of multinationals. The most high-profile tax measure would retroactively tax business deals in which a non-resident transferred shares into a non-Indian company that derives its value “substantially” from Indian assets.

That measure is being vigorously fought by Vodafone, the UK telecoms group, which would be faced with a huge additional capital gains tax hit on its 2007 purchase of Hutchison Essar, an Indian mobile operator. Vodafone had won a ruling on the issue before the Indian Supreme Court and is now threatening to bring further legal proceedings against the Indian government for violating a bilateral investment treaty.

US companies are watching the developments extremely closely amid fears that they too could be vulnerable to much higher taxation on their Indian operations – which have grown substantially in recent years.

“There is a depth of concern that is unprecedented in the US business community about a broad range of Indian economic policies that will negatively affect trade with and investment in India,” says Susan Esserman, a former US trade official who now chairs the international department at Steptoe & Johnson, the law firm.

“India is a very important trading partner and strategic partner and that is why this is very concerning.”

The US Treasury declined to comment on the letter to Mr Geithner. He is slated to meet Pranab Mukherjee, the Indian finance minister, this week on the sidelines of the IMF and World Bank gatherings. Pressure from the US lobbying groups will raise the odds that he will press the matter.

The letter was also signed by the Financial Services Forum, which counts Lloyd Blankfein, chief executive of Goldman Sachs as its chairman, and the Information Technology Industry Council, whose members include, Microsoft and Cisco. The Indian embassy in Washington did not immediately reply to a request for comment.

The pressure on Mr Geithner comes after George Osborne, UK chancellor, made a public intervention on the matter earlier this month on a trip to New Delhi, chastising the Indian government for its proposed changes and warning of potentially harmful effects on trade and investment.

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